Why You Shouldn’t Shop for the Holidays

Joel Waldfogel doesn’t talk about Christmas the way most people do. “I was struck by how the resource allocation occurring through gift-giving was sharply at odds with the way we talk about resource allocation in economics,” he said. That’s what set Waldfogel, a professor in the Department of Business and Public Policy at the University of Pennsylvania’s Wharton School, to writing Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Below, he chats about why Christmas isn’t good for the economy and what makes the ideal gift.

Q. Why is Christmas inefficient?

A. Normally I’ll only buy something for myself if its value exceeds the price. I’ll buy an object that cost $50 if I expect it to be worth at least $50 to me. Gift-giving is really different. When I’m buying gifts, I’m usually at a large disadvantage. I don’t know what my recipient wants. I don’t know what they already have. It’s possible that if I set out to spend $50 on them, I’ll buy something worth nothing to them. It was that insight – that possibility – that got me started doing surveys. I would ask people in these surveys: list the items you received as gifts, and for each item, to say who gave it to you, what you think they paid for it, and what is it worth to you just as an object – not as a sentimental item. I also eventually began asking people to report the same information for items they had purchased themselves. That gave me data from which I could ask, how much less or more are items we receive as gifts worth to us per dollar spent, compared to items we purchase ourselves. I’ve come to the answer that it’s about 20% less. Given the amount of spending, that’s 20% in missing satisfaction.

Q. It sounds like Christmas is inefficient for individuals—but what about for the economy as a whole? Is spending good for us?

A. It’s often said that spending is good for the economy. We hear this all the time. Every Christmas there are stories in the newspapers about whether spending is on track to beat the last year’s numbers. It’s a bit misleading. Every transaction has two parties – a buyer and a seller. Each of those parties, in a normal transaction, gets something useful out of that transaction. The seller gets a price higher than what the product cost them. The buyer gets an item worth more than the price – some surplus that amounts to the difference between how highly they value the item and how much they pay. A normal transaction actually maximizes that surplus. With gift-giving, it’s different. It’s still true that sellers get a price in excess of their cost. But now the ultimate consumer of the object purchased gets something not worth more than the price paid, and certainly on average worth less than items they would have chosen for themselves. It’s good for sellers, but it’s not nearly as good for buyers as spending should be. Buyers are people too.

Q. Can you quantify how much we spend at Christmas?

A. The National Retail Federation says we spend $450 billion a year in the U.S. Their numbers include all November and December retail sales. I think that’s a huge overestimation. I think a more reasonable way to measure it is simply to look at the retail sales data and realize they bounce around from month to month, jump in December, and fall back in January. A conservative way to make the estimate is to take the December spending level minus the average of the two months around it. That’s $65 billion. I multiply that by 20% missing satisfaction, and that’s where I get my $13 billion deadweight loss.

Q. How does the U.S. compare with the rest of the world when it comes to Christmas spending?

A. I assumed we would be the world leaders on spending. One way to measure Christmas spending, as I mentioned, is to look at that December bump, and the percentage increase relative to the months around it. By that measure, the U.S. is about 20th. We’re well below the median of OECD countries. Per capita spending is a dicier measure, but still, we’re nowhere near the top. On the one hand, Americans have a self-image problem around the world, an image of vulgar excess.

But the bad news here is, and I identify this problem in the book, is that worldwide, or at least in the OECD countries, we’re spending $150 billion on gifts. Take 20% of that, and it’s a lot. That’s what we’re vaporizing in the celebration of Christmas. The top-spending countries are Norway, the UK, Italy, Finland and France. France, can you believe it? That’s in terms of per capita holiday spending since the year 2000.

This is why I bid people happy and efficient holidays.

Q. Without Christmas, wouldn’t we spend less in December? And in this light, how significant is the loss?

A. The bump in spending is almost surely due to Christmas. You see it in all the Christian countries – you don’t see it in Israel or China or Korea. You do see it in Japan, where they celebrate Christmas as a commercial holiday. Having said that, the timing of the spending is important. A lot of what’s purchased at Christmas is stuff we need later, like the socks and underwear under the tree. We’re not buying them at Christmas, even if we would buy them later. We’re getting them as presents, so we’re effectively buying January and February stuff in December. So some of what happens at Christmas would happen anyway, just not as Christmas. Some of it, certainly, is caused by Christmas – you wouldn’t purchase it otherwise. I can’t quantify which is which. But if you look at retail sales data, the numbers bounce around, but in January and February. They tend to be way below their typical level even in November. That is, what would have been January or February spending happens in December. It’s like, let’s wrap up everything I was going to get you in the next six weeks or that you were going to buy in the next six week, except I’ll choose it for you and it’ll be the wrong size and the wrong color.

Q. What’s the ideal gift?

A. Literally the ideal gift would not only get rid of this inefficiency but also do better. The dim view is that the best gift is cash. The transcendent view is – my present is something for you that you wouldn’t purchase, but it’s more than what you would purchase for yourself. It opens something for you. Say, the musical artist you don’t know about, but I know you would like because I know your tastes. Those gifts are possible – but my research shows they’re just not typical. They’re much more likely if we know the recipient well. People who are in frequent contact do much better – the better I know you, the better I’m able to buy something that at worst doesn’t destroy value, and at best is better than what you would have chosen for yourself. It’s better than cash because it goes beyond what someone would do for himself.

Q. Are gift cards better than cash?

A. Gift cards take away situations that would produce outright losses – the recipient can choose what they like. The ideal economic solution, in principle, is just to give people cash. If they have cash they can get what they want. But psychologists have found that cash is a socially awkward gift in our culture, though not in all cultures. The last think I want to do is advocate doing something people find awkward. So gift cards are very popular. They’ve exploded – they’re about one-third of gift-giving. They function a lot like cash, but they have none of the stigma. They’re at the top of most-wanted gifts lists. They allow givers to give something like cash and surrender decision-making authority to the recipient. Here again, though, I don’t advocate their use. If you know somebody well and know what to get, that’s what you should do. It’s the people with an obligation to give to someone they don’t know well – those are the people at risk of destroying value. Gift cards are a good alternative for them.

I do have one misgiving about gift cards though – 10 percent of the value is never redeemed. That means the giver pays $100, and the recipient gets $90 worth of purchasing power. On average, the other $10 goes to the retailer because after a certain number of years, if the card hasn’t been redeemed, they just take the money back. That’s not exactly inefficient, it’s just that 10% of the gift goes to the shareholders of the retailer instead of to the recipient. It’s not what the giver had in mind.

I’m on a soapbox here – so I would suggest it would be nice if retailers issued gift cards that defaulted to charity after two years. In California, you can take a balance below $10 out as cash. That’s one way to deal with it. Some states say that unspent balances are the property of the state. I think it would be nice if retailers issued cards and gift-givers would know their generosity was going to a loved one or to a worthy cause.

Q. Do you celebrate Christmas?

A. We do give gifts in our household, for holidays and other occasions. The main consequence of all this is that people don’t give me gifts.

Q. They’re probably too nervous about picking the ideal gift.

A. They suspect sometimes that I’m ungrateful. I wouldn’t say “I hate this” to someone’s gift. We are bound by social norms, we’re bound to say thank you – it’s one of the reasons this whole inefficiency persists. I mean, I’m glad we’re bound by norms, but it really perpetuates this custom.

Q. What is the best gift you’ve ever received?

A. A fellowship to study economics at Stanford. I was delighted when I got it, and it turned out to be even more wonderful than I had anticipated. Now I know the development offices will be after me!

*Photo of gift courtesy sparkieblues.